From The Business Pages, Oct. 27, 2008

October 27, 2008

Former
Treasury Secretary and frequent Financial Times columnist Larry Summers
has a good
piece this morning reminding policymakers to keep an eye on the very
big picture as they craft a response to the financial crisis. While
short-term fixes may be necessary, he writes, it’s important to remember
that the foundation of the last two booms has been remarkable U.S.
productivity growth, which in turn fueled consumer spending and
investment. A drop in productivity, then, is the real problem underlying the crisis. And, indeed, according to the Bureau of Labor Statistics, productivity
grew 2.64 percent annually between 1995 and 2004, but it has grown just
1.4 percent annually since then. Summers is, for lack of a better word, a
productivity progressive, and like his cohort--Bernard Schwartz, Gene
Sperling, Rob Atkinson—he believes the government has to take an
aggressive stand on infrastructure, innovation, education, and other
factors that boost productivity if the country is going to return to its
past, glorious growth rates. Should Obama win, let's hope this becomes a major theme in his economic policy.

One
mystery yet to be unraveled is why the precipitous drop in oil prices--who
would have predicted, nine months ago, that it would ever reach $63 a
barrel again?--hasn’t buoyed the markets. Of course, oil prices are
largely predicated on expectations of future demand, and the drop in price
is a reflection of investor fears of reduced global growth rates. Still, it’s
a lot of extra coin in consumer pockets. (For what it’s worth, I think the
price will go back up in the next few months; right now investors are
trying to disambiguate the drop in demand due to high prices from the drop
in demand due to the financial crisis. I think they’ll find that
underneath it all is a surprisingly high level of rock-solid demand, and at
that point they’ll start pushing the price up again. Not to the $120
range, but still.)

The New York Times has done a great job
bird-dogging the details of the $700 billion bailout--in particular, that banks are likely to use the money for acquisition sprees, not
lending, and that this was the government’s unspoken goal all along. Joe
Nocera has an absolutely must-read
column this morning in which he regales us with comments from a JP
Morgan Chase conference call, including this nugget from an unnamed
executive: “What we do think it will help us do is perhaps be a little bit
more active on the acquisition side … we would think that loan volume will
continue to go down as we continue to tighten credit to fully reflect the
high cost of pricing on the loan side.” As Nocera concludes, archly, “It
is starting to appear as if one of Treasury's key rationales for the
recapitalization program--namely, that it will cause banks to start
lending again--is a fig leaf, Treasury's version of the weapons of mass
destruction. In fact, Treasury wants banks to acquire each other and is
using its power to inject capital to force a new and wrenching round of
bank consolidation.”